Chipotle Mexican Grill, Inc. (CMG) Wants to Be the Next “Chipotle of Pizza”

by Motley Fool on December 19, 2013

Apparently Chipotle Mexican Grill, Inc. (NYSE:CMG) has had enough of pizza chains trying to position themselves as the next “Chipotle of pizza.” If consumers are looking for a Chipotle Mexican Grill, Inc. (NYSE:CMG), then the restaurant chain believes they ought to get the real thing. Chipotle announced yesterday it is getting into the pizza business through a partnership with a small fast-casual shop called Pizzeria Locale.

Fast-casual is hot at the moment. Though comprising just 14% of the total $223 billion limited-service restaurant segment, growth is outpacing both the quick-serve and full-service segments, and the trend is expected to continue. Whereas the market researchers at Technomic say that all limited-service restaurant growth is expected to increase at a compounded annual rate of 4.5% through 2017, they expect fast-casual restaurants will grow 10% on average over the same time frame. NPD Group also says the segment is a leader in adding new restaurants.

As the “better” food niche took off, Panera Bread Co (NASDAQ:PNRA) led the conversion of the fast-casual “bakery” segment, just as Five Guys did with hamburgers and Panda Express accomplished with Asian cuisine. Now it’s spreading to pizza, and market watchers think this latest trend can catch on.

Analysts see pizza having an allure that sets it apart from other fast-casual concepts. This past summer, Technomic suggested made-to-order pizza could launch forward because the product lends itself to use of fresh, gourmet ingredients that can capitalize on “health and wellness concepts.”

Mall-based pizzeria Sbarro has plans to develop a midlevel concept called Sbarro Brooklyn Fresh that caters to the pizza lover looking for higher-quality and fresher ingredients while retaining the speedy service. Other players in the space include Blaze Pizza and Pie Five, while PizzaRev is a project that, like Chipotle Mexican Grill, Inc. (NYSE:CMG)’s Pizzeria Locale, is getting financial backing from a well-known restaurant brand, in this case Buffalo Wild Wings.

Since Chipotle Mexican Grill, Inc. (NYSE:CMG)’s launch two decades ago, the fast-casual space has become a major force within the dining industry, generating $31 billion annually in sales. Trailing revenue at Chipotle totals about 10% of the niche as a whole, with sales growing at a compounded rate of 19% annually over the last five years. Analysts forecast the Mexican restaurant chain will continue to grow sales at better than 16% through 2017.

Even so, I’m not convinced pizza is as much an opportunity as analysts contend. I see it as something more of a fad in this space. Yum! Brands, Inc. (NYSE:YUM) Pizza Hut chain already offers something of a fast-casual pizza experience, yet same-store sales have been weak, falling 1% last quarter. In contrast, quick-serve pizza joints Domino’s Pizza, Inc. (NYSE:DPZ) and Papa John’s Int’l, Inc. (NASDAQ:PZZA) have done appreciably better, with comps up 5% and 2%, respectively.

The first restaurant collaboration between Chipotle Mexican Grill, Inc. (NYSE:CMG) and Pizzeria Locale opened last May in Denver. While two more are now planned for the city, this won’t become a sizable portion of Chipotle Mexican Grill, Inc. (NYSE:CMG)’s business anytime soon. The chain said it will take on “slow, measured expansion” to work out the kinks.

And that’s just as well, since local pizza shops already dot the landscape in almost every town across the country. There isn’t the same need for a specialty pizza restaurant as there was for specialty restaurants in other niches, and though you could point to the proliferation of sub shops, Chinese food takeout, and McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW) before Panera Bread Co (NASDAQ:PNRA), Five Guys, and Panda Express came on the scene, pizzerias already use fresh ingredients and a pie in 10 minutes is still pretty quick.

So while it makes some sense that a new, fast-growing concept should feature a leadership role from one of the leading industry chains, no matter how you slice it, I’m not sure this will develop into anything more than a curiosity.